Let’s Amend, Not End, Capitalism


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The United States prides itself as being the “land of opportunity”.  With the U.S. being a favored destination for immigrants across the world, that distinction still has merit.  However, there are disturbing trends where many are questioning the value of capitalism due to its contribution to income inequality.  Even so, we must acknowledge the role that capitalism played in lifting not only Americans out of poverty and into prosperity, but in Canada, Europe, and all parts of the world.  Having said that, we must recognize that our current economic system needs to be amended to level the playing field.

Many Americans are divided on the moral implications of income redistribution.  On one hand, there are those that believe that extravagant wealth is immoral and that there should be a limit on executive pay.  In fact, Japan has embraced this culture and have stifled executive pay.  Their executives must publicly disclose their pay if it exceeds $1.1 million and only 7.5% of them exceeded this baseline.  That is dwarfed by American executives, whose top 10 earn between $43 to $131 million in annual salaries.

Then there are others, who believe too much income redistribution is immoral because it unfairly penalizes hard work and achievement.  When an individual makes sacrifices in their education and career, why should they be forced to give up a portion of their earned pay to subsidize an irresponsible individual, who squandered opportunities by not valuing their education early in life?  If taxes are increased substantially as your income rises, then the payoff of extra work and risk is lowered.  Why go through the rigors of medical school, engineering, and law school, when one can make a similar amount in a less demanding field?

In deciding between two competing narratives, the difference comes down to economic mobility.  Is our present economic system more conducive to promoting competition between social classes?  Unless one believes that effort and ability is only consigned to the affluent, one would think that the U.S. economy and its promotion of economic liberty would result in healthy movement between the poor, middle class, and upper class.  However when compared to our peers, we are laggards Markus Jantti’s study comparing the U.S. with the United Kingdom, Denmark, Norway, Sweden shows that Americans are less likely to rise from poverty across generations than any of those four countries.

Certainly, it is fair that a successful professional, who has excelled at their craft, should be able to pass their hard-earned dollars to their children to help them compete.  One of the motivations to taking on additional responsibilities on a project or working 60-70 hours a week is to provide a better life for our children.  That means living in a better neighborhood and access to superior schools.  However, should there be limits imposed on those advantages in the form of higher taxes?

Specifically, there’s a growing body of research that income inequality imposes significant costs on the economy.  In order to counter these costs, there are policy initiatives that would boost equality and shift the economic gains would shift from the affluent to the low and middle class.    When there is too much income inequality, it can actually inhibit economic growth and cause more instability.  Raghuram Rajan elaborates on this view in Project Syndicate.  Specifically, he blames deregulaton and legislative acts promoting home ownership as the root causes of the financial crisis as low- and middle-income households took on too much debt to maintain their standard of living in the face of declining income growth.

With rising inequality, the occurrence of rent-seeking is more prevalent.  This is where individuals use their financial resources and influence to affect policies that benefit their interests over society.  The prevalence of special interest groups and less restrictive campaign financing laws provide the potential to seek loopholes and other avenues to enrich themselves at the expense of others.  Columbia University economist Stiglitz pointed to lack of effective oversight of the financial industry where irresponsible mortgage products caused our steep recession.  Then there are exploitations of the tax code where societal benefits are minimal when these advantages boost corporate balance sheets, rather than worker payrolls.  Lastly, it stunts the progress of competitors who are not able to buy influence.

It is imperative that we achieve legislative reform that minimizes the influence of special interests and replace it with investments toward minimizing the skills divide.  A two-pronged attack is necessary.  First, we need a quick fix in updating adult skill sets that are struggling to meet the requirements of a technology-based economy.  As for schools, they must find ways to increase academic performance within low-income and middle-income households despite challenges within family structures and less than ideal neighborhoods.  This must start with better parental training and access to early child education resources.  Both will require more funding and resources.

Capitalism remains the ideal economic system in the world, but ignoring the negative effects of income inequality can lead to its demise.

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8 thoughts on “Let’s Amend, Not End, Capitalism

  1. Reblogged this on Who Plans Whom? and commented:
    Economic professor Aaron Johnson has a thoughtful post on the need for economic mobility.

    I agree that income mobility is far too low, but I wonder to what extent the drug war contributes to that. Having an arrest record and being incarcerated would seem to reduce employment opportunities and result in more single-parent households, especially since the drug war seems to be targeted at poor people.

    I agree with him that we need more focused education, but most people have already served years in government schools. It seems that a more grassroots and less political approach might be more amenable. Reducing barriers to entry like occupational licensing laws could also unshackle some people from the need for wage labor and increase entrepreneurial opportunities.

    • Justin, thanks for sharing my blog on your post. I agree that our current public educational system is not meeting our needs. In my opinion, providing comprehensive results across all schools (public and private) will lead to better decision-making from the public. Whether that means revamping the public school model or considering alternative models does not matter. What matters is that we are achieving results that will make us more competitive globally.

  2. The drug war has certainly played a role in expanding the divide. Even though drug use among the races are similar, there is a disparity in arrests, which I attribute to higher rates of other crimes in cities relative to suburbs. When it comes to drug use, I can see reshifting our focus to rehabilitation, rather than punishment. It’s very costly to not only taxpayers, but drug users who are much less employable as a result of convictions. I do fall short of legalizing drugs and believe that we must continue prosecuting drug dealers. We need to recapture our moral compass and not resort to breaking laws to satisfy our desires.

    • Hi Aaron,

      I agree that drug use can be destructive, but I’m more skeptical that we can rely on politicians to shepherd our moral guidance. More fundamentally though, when we take away people’s opportunities to made decisions (even bad ones), that means removing people’s experience with making good decisions (since choice is removed) and removing the positive feedback of making good decisions. However, I agree that the government should restrict violations of the rights of others, so that people are free to act morally.

      • I appreciate and I’m pretty much in agreement with what you said. I do agree that our politicians have not always worked in our best interests, though I think this could be fixed by insisting on greater transparency and increasing voter education.

  3. Prof. Johnson,

    I enjoy your balanced approach to economics, and I too believe in the merits of true Capitalism based it’s obvious results. The effects of greedy, and political corruption over the years has transformed the American dream of upward mobility into a slow nightmare of mediocrity for the vast majority of Americans. The gap between the wealthy and the masses is widening not necessarily because of a lack of mobility or opportunity…the gap is widening because the masses are mis-educated and distracted. Carter G. Woodson stated in the “Mis-education of the Negro”…

    “History shows that it does not matter who is in power or what revolutionary forces take over the government, those who have not learned to do for themselves and have to depend solely on others never obtain any more rights or privileges in the end than they had in the beginning.”

    I applaud you for your willingness to help others to think and do for themselves, and please continue to fight the good fight of faith! I wrote an article addressing our mis-education… http://teamao.wordpress.com/2012/02/05/necessities-of-the-many/

    Please let me know your thoughts.

    God Bless,
    Raymond

    • I appreciate you taking the time to comment on my blog and I hope that you will share it with your friends. I will definitely read your article and comment back on your blog. My goal is to create dialogue and consider alternative viewpoints. I do believe that approach will enhance our learning, whether it changes our views or not. Thanks again!

  4. Criminal records are a significant contributor, and predictor, of poverty. One in three to four Americans has some kind of record today. We have more laws, individual regulation, and policing bodies than any country in the world. Even old misdemeanors are barriers to employment; as all criminal records in this country are indefinitely visible (unless one secures an expungement- but that creates another issue of ‘unequal treatment under the law’- as not everyone is afforded that opportunity). We have also traded ‘due process’ for ‘plea deals’- which have been proven to result in more innocent people being pressured into charge, they may actually be innocent of. If everything is going to be based on ‘monetary incentives’- including arrests/convictions and legal representation- we have set ourselves up for gross human rights violations. Pure Capitalism comes into direct conflict with the Bill of Rights; if one were to look closing at the implications of a ‘monetarily incentivised’ justice system. Old misdemeanors, that have not been afforded due process- for the sake of cost- should not be barriers to employment for life! THAT IS WRONG!!!

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